Understanding Equity

Home equity is the part of your home’s value that you own outright. If you have a mortgage, you do not own the whole home – your mortgage lender has an interest in it as well.

For example, if you sold your home for $600,000 and had a $400,000 mortgage, the lender would get $400,000, and you would get $200,000 – your equity in the home. You can calculate your home’s equity using a simple equation:

Current market value
of home

Outstanding mortgage balance

=

Your home
equity

$600,000

$400,000

=

$200,000


Short of selling your home, how can you determine what the current market value is? To get the number, you can either do a comparative market analysis or have your home professionally appraised. A comparative market analysis is an informal estimate of your home’s market value. By plugging your data into a home value calculator, available on many real estate websites, you can obtain a ballpark figure of what your home is worth. Another option is to ask a local real estate agent to give you an estimate of the price your home could sell for.

For a more precise estimate, you may hire a certified appraiser, which typically costs a few hundred dollars. This appraisal takes many variables into consideration, including your home’s:

  • Square footage
  • Construction quality, design, and floor plan
  • Neighborhood
  • Access to transportation, shopping, and schools
  • Lot size, topography, view, and landscaping

You can build equity through making a down payment when you purchase your home, paying down your mortgage balance by making the monthly payments, and experiencing appreciation. Appreciation occurs when market demand rises. For example, if you bought your home for $200,000 a few years ago, it may someday sell for $250,000 because prices in your neighborhood have increased. Your property may also appreciate if you made repairs or home improvements. While home values tend to appreciate over time, they do not have to. When the value depreciates, your equity decreases. If it depreciates enough, you could have negative equity, where the value of your house is less the amount you owe on your mortgage.